Time Warner Spins Off Cable Unit

Corporate giant Time Warner had made good on its plans to sell its cable and broadband business—except the company is not selling its cable unit, but will instead spin it off into its own company. In a deal values at about $10.9 billion (PDF), Time Warner will completely split with Time Warner Cable by the end of 2008.

“After the transaction, each company will have greater strategic, financial, and operational flexibility and will be better positioned to compete,” said Time Warner CEO Jeffrey Bewkes, in a statement.

Although Time Warner’s cable division has essentially been the one fiscal bright spot for the company in recent days, the move will likely receive a positive reaction from investors, who now consider it a poor idea for a company to be both in the content creation business as well as the content distribution business. By spinning off Time Warner Cable, Time Warner divests itself of programming and media distribution assets; it also buys itself some time (and money) to figure out what to do with its struggling AOL unit, which has had difficulty competing with the likes of Google, Yahoo, and Microsoft, both in terms of offering compelling free online services and attracting advertising dollars to those services.

The divestiture is a somewhat tricky transaction: Time Warner will exchange its 12.4 percent stake in TW NY Cable Holding for 80 million newly-issued shares of Time Warner CAble’s Class A common stock, increasing its ownership stake in the cable company to over 85 percent. If getting deeper into a cable operation sounds like a weird way to spin it off, here’s how that works: Time Warner Cable will pay Time Warner a one-time dividend of $10.27 per common share just before the transaction closes. That’s a payout of about $10.9 billion, of which Time Warner will receive about $9.25 billion. Time Warner Cable will fund the dividend through existing credit and a two-year bridge term loan from a series of banks, although Time Warner is letting itself stay on the hook for up to $3.5 billion in short-term loans to help the cable outfit repay the bridge loan.

As a result of the deal, Time Warner Cable will be able to make its own investments and deals using its stock, which should free up the company to make distribution deals and partnering arrangements that were difficult-to-impossible, since Time Warner often competes directly with other media companies, making them reluctant to partner with the cable operation.

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